Estimates may vary

August 10, 2017

The article “UK university pension scheme deficit widens to £12.6 billion” is misleading. The Universities Superannuation Scheme is not in deficit in the ordinary meaning of the word. It is very cash rich – it made investment income of about £1.5 billion last year on top of paying its pensions. The deficit is a notional shortfall between estimated liabilities and assets.

The whole issue is about how these figures are calculated. The article reports the liabilities and deficit as solid facts rather than estimates based on particular assumptions. A more nuanced discussion would have reported the difficulties that beset estimating liabilities and would have noted that there is a wide range of estimates in the USS’ annual report. Your article was one-sided because your pensions expert has a strong neoliberal point of view and favours a particular approach.

The figure in the story assumed a gilts discount rate. Why the USS should use this method is not clear because the scheme invests mainly in assets such as equities that generate a high rate of return. As gilt rates are currently very low, liabilities appear to be very high.

But the report does also state that at the 2014 valuation, the liabilities on a best estimate basis were £38.1 billion, giving a surplus of £3.5 billion. It is likely that this surplus will still be there when the 2017 valuation is done.

The “best estimate” liabilities figure is surely much more appropriate. USS members need to be aware that the valuations are being done using an outmoded mark-to-market methodology that is not fit for purpose any more in the world of quantitative easing and associated low interest rates.

Dennis Leech

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